The Future is Here, and Faster than Expected

When COVID began surging through the Australian and international economy the economic carnage was tangible.

During the early weeks of the pandemic we witnessed scenes not seen in decades. Unemployment queues snaked around city blocks.

We all know someone who subsequently lost work or whose business has collapsed. Once JobKeeper ends, unemployment is projected to peak at eight per cent. And of course, this is foremost a health crisis.

So how then can we explain the post-pandemic stockmarket surge?

Since late April, the ASX200 has risen 13 per cent. In the US the Dow Jones Industrial Average is up even more, 14.5 per cent. Some of this is simply clawing back losses from the depth of the sharemarket panic and loses.

In March and April, nobody could tell how bad this virus would get.

Markets hate uncertainty.

Part of the answer lies in the historically cheap cost of borrowing.

Over the past decade, the world has been increasingly awash with cheap cash. Both the cash rate and bank funding costs have more than halved, from a little over four per cent to well below two per cent.

As anyone who has recently refinanced their mortgage can attest, it has never been cheaper to borrow. For stockmarket investors, the return on that borrowing – the yield – need not be as high as it once was to justify the decision to invest.

In turn this means there are more investment dollars chasing the same shares, which fuels upward lifts in share prices.

But another more interesting dynamic is at work.

Global sharemarkets are always changing, the rate of change has accelerated in the pandemic. For example, the global share markets (represented by the MSCI World Index) has changed dramatically.

This time last year, financials made up about 17 per cent of global stockmarkets. But that is shrinking quickly as bank margins are compressed by lower interest rates and banks face the prospect of rising default rates.

At the same time, disruptive technology stocks such as Apple, Alphabet (Google), Facebook, Netflix, Microsoft and Tesla are soaring.

These six stocks alone now account for 15 per cent of the market capitalisation of the developed world markets, and the IT sector now accounts for 22 per cent.

Lockdowns and other restrictions on our movement have accelerated this trend.

Mortgage repayments are cheaper than ever. And while confined to our homes, we are ploughing at least some of those savings into streaming movies and television programs on Netflix or YouTube.

With many of us still working from home, perhaps for some time to come, demand for new computer hardware and software is also soaring.

Technologies that bring the world to the home are the winners.

This shift away from finance is also happening on the Australian market though it isn’t as pronounced given the small size of our tech sector.

What all this points to is an accelerated trend towards companies that reflect a new economy. The winners have surged, lifting the overall indices while more traditional sectors such as finance and industrial have not had the same trajectory.

What we are seeing is a fundamental shift in society through a leap forward in technologies and their acceptance, which is likely to persist long after the pandemic has receded.

At TWUSUPER, our Chief Investment Officer Edward Smith is leading a review of our investing approach in the light of a changing world and emerging risks and opportunities.

Alignment of our goals with people in transport and their better futures is core. We believe that our smaller scale compared to the largest funds will enable us to take on niche investment opportunities and to be more agile.

The pandemic has also provided an opportunity for us to manage our investment costs.

Our latest Product Disclosure Statement shows that for the average $50,000 account this has resulted in an annual saving of approximately $91. We expect to announce further substantial savings early in the new year.

We felt great pride this year that people in transport were finally recognised by the public for what they do every day. Heck, even the term ‘supply chains’ or availability of food for drivers between Melbourne and Sydney was discussed positively in the media.

Changing times are a great catalyst for renewal and my view is that although it’s been an awful year in many respects, we will learn a great deal from it.

I am looking forward to 2021 and being able to share more about our investing strategies and alignment with the people that keep Australia moving — your people.

Frank Sandy, CEO of TWUSUPER has been with the fund since 2005, with previous roles managing both finance and human resources. Frank is a CPA and has a Degree in Business Studies in accounting as well as a wealth of experience in finance and superannuation.